Active ownership of passive Exchange Traded Funds (ETFs)
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Active ownership of passive Exchange Traded Funds (ETFs)
Table of contents
Foreword 2
Active ownership – engagement 3
Active ownership – collaborative engagement 6
Active ownership - voting 7
Active ownership – public policy and advocacy 9
Active ownership for our HSBC ETFs – looking forward 10
Important information 11
1Foreword
At HSBC, we are active stewards for our ETF clients
ETFs are an efficient way to invest in a range of markets without having to spend time choosing individual stocks.
These funds aim to replicate the investment returns and characteristics of an index. Managers of passive ETFs do not
have discretion to reduce exposure to, or divest from, the companies in the relevant index.
Precisely because they cannot sell the companies in an index, ETF investors are the ultimate long-term owners. How
well companies manage the environmental, social and governance (ESG) issues that impact company returns over
time therefore is of crucial importance to ETF investors. In the same manner ETF managers who undertake detailed
stewardship of the companies in their funds are working to protect and enhance the returns of their ETF investors.
That’s why at HSBC we are passionate about the stewardship of our ETF assets.
We are large, long-term owners with the scale, reach and depth of knowledge to be effective in exercising our
fiduciary duties to engage with the companies we hold on behalf of our clients.
Our ETFs are part of our global asset management business, with over USD74bn 1 of assets under management in our
passive and systematic equity strategies.
Our active ownership, aiming to support and encourage companies to follow principles of good governance, and
environmental sustainability, means we can positively impact the long-term value of our client’s investments.
Effective stewardship is widely regarded as a driver of enhanced operational and financial performance. It helps to
reduce risks and maximise returns at the individual investment level, as well as enhance overall market stability and
deliver positive impacts for society and the environment more generally.2
At HSBC, we are able to use our significant influence as investors to encourage corporate behaviour that enhances
value, through company engagement, proxy voting, and as signatories to investor stewardship codes as the
Principles for Responsible Investment, the UK Stewardship Code and the Hong Kong Principles of Responsible
Ownership.
This paper provides a brief summary of our proactive engagement, voting, public policy and advocacy activity as
active stewards for our passive ETFs, and gives an insight into how we leverage our extensive experience and depth
of resources in these areas for the benefit of our ETF clients.
1
Source: HSBC Asset Management, as at end December 2020
2
Source: ShareAction ‘Point of no Returns’ report, March 2020
2Active ownership – engagement
At HSBC, we prefer to engage with companies to inspire change rather than exclude them, whilst for many of our
ETFs exclusion is not an option for funds which hold shares in all the companies in their index. Our stewardship has
been recognised as market leading, with A+ ratings from the global Principles for Responsible Investment and a Tier 1
ranking under the UK Stewardship Code3.
We engage with fund constituent companies to improve company practices, across a range of environmental, social
and governance issues, as shown below:
Themes discussed during company engagements4
70
60
50
40
30
20
10
0
Column1
Stra tegic Capital Usage (62%) Corporate Governance (51%) Corporate Behavious (36%)
Labour Sourcing Safety (21%) Climate Change (21%) Product Liability Safety (14%)
Renewables Clean Tech (13%) Pollution Waste (11%) Wa ter Natural Resources (8%)
Given the typically diverse make up of passive portfolios, smaller players may lack the depth of research resources
and depth of knowledge needed to engage constructively with constituent companies, but we engage across equity
and fixed income holdings globally, leveraging our extensive research capabilities across both asset classes.
In 2020, we carried out 2,300+ issuer engagements globally. Through our engagement with companies held within
our ETFs, we aim to convey investor concerns and look for these to be addressed, recognising that sometimes a
number of engagements is required for change to be brought about. We prioritise engagements based on our
holding, issue and exposure, not necessarily whether we expect change, although we can demonstrate positive
outcomes in many instances.
More details of HSBC’s engagement activities can be found in our annual Responsible Investment Review, which
provides investors with key information about our active ownership undertakings and illustrates the importance we
place on stewardship.
3
Source: Annual PRI (Principles for Responsible Investment) assessment, 2020; UK Stewardship Code, 2016
4
Source: HSBC Asset Management, as at 31 December 2020
3Examples of our engagement include:
Tesco – constituent of the HSBC FTSE 100 UCITS ETF and HSBC MSCI Europe UCITS ETF
Issue Engagement Change
We conducted a thematic First we wrote to the company and We were encouraged that the Tesco
engagement project into post- outlined our research, views, and team agreed with our assessment of
consumer packaging waste risks questions. Tesco offered us a the risks and opportunities presented
faced by consumer staples written response as well as a formal by post-consumer waste, and are
companies. Our research suggested engagement meeting with one of implicitly focused on absolute waste
Tesco was highly exposed to the their managers for packaging reduction.
risks of packaging waste but was reduction.
In early 2021, the company announced
also a leader in managing the issue.
We learned about Tesco’s plans for it had removed 1bn pieces of plastic
However, we felt there were a
refillable packaging, reverse from its packaging in the past year.
number of aspects of their
vending, and setting appropriate We hope to see the company expand
packaging waste practices and
waste reduction targets. We the target and give investors more
policies that we wanted to
encouraged the company to make granular detail on the absolute
understand better and influence.
absolute waste reduction by weight packaging weight reduced.
explicit in its goal setting.
We are considering how we can
support this work further via our
engagement, voting and advocacy.
Samsung Electronics – constituent of the HSBC MSCI AC Far East ex Japan UCITS ETF
Issue Engagement Change
We had concerns regarding We have met with the company We were already engaging with the
Samsung’s approach to working regularly over a number of years to company when the Chair and several
conditions, health and safety raise our concerns and seek other Executives of the company were
standards and related disclosure. company commitments that they sentenced to time in prison for
will be addressed. undermining labour union activities in
There have been serious allegations
South Korea.
of human rights and labour rights
violations including health and We will continue to engage with the
safety practices linked to worker company on labour standards,
deaths, poor wages, unpaid including Freedom of Association
overtime, obligatory overtime and across all geographies where they
extended work hours, no time off operate.
work, exploitation, intimidation and
union busting at the company’s
factories.
4Facebook, Alphabet and Twitter – constituents of the HSBC S&P 500 UCITS ETF and HSBC
MSCI World UCITS ETF
Issue Engagement Change
Engaging with the social media Following the transmission of the We were signatory to letters raising
companies on the issue of live- violent attacks in New Zealand, we our concerns to the companies.
streaming and distribution of joined a collective engagement Subsequent meetings with Facebook
content that promotes or supports – initiative with Facebook, Alphabet and Twitter have provided greater
or tends to promote or support – and Twitter to encourage the clarity on the different company
acts of torture, terrorism or the companies to establish robust approaches, although it is not clear
infliction of extreme violence or policies and procedures to manage whether changes implemented are
extreme cruelty. these risks. proportional to the scale of the issue
and risk.
This engagement is led by NZ
SuperFund. Alphabet have improved disclosure of
their controls over content, although
do not engage in open dialogue on
ESG issues.
Source: HSBC Asset Management, 2021.
For illustrative purposes only and does not constitute any investment recommendation in the above mentioned companies.
This example is historic and contains information that is not current and should not be construed as an offer to sell or a solicitation of an offer to purchase or subscribe
to any investment, and does not constitute any investment recommendation in the above mentioned companies. The views expressed were held at the time of
preparation and are subject to change without notice. Any forecast, projection or target when provided is indicative only and is not guaranteed in anyway.
5Active ownership – collaborative engagement
We actively engage in investor-led collaborative engagement initiatives. These may form part of a broad initiative to
address systemic issues or may reflect an escalation of company-specific concerns shared by investors.
Collective engagement helps companies by allowing a focused dialogue with a number of investors on issues of
concern. Collective effort can be more efficient and lead to better results, because companies get a chance to hear
the same view from more than one investor. At the same time, it allows investors, whether in passive or active
strategies, to share resources and insight, allowing them to engage more effectively with each company they
approach.
As our ETF clients would expect, we are fully transparent in our reporting of our engagement and voting activity,
publishing our voting on a quarterly basis and summary information about our engagement activity annually.
An example of where HSBC has helped to lead collaborative engagement is Climate Action 100+, the largest ever
global collaborative investor engagement initiative, seeking alignment with the Paris Agreement. There are over 540
investor signatories under the initiative with USD52 trillion in AUM5 – this scale provides us significant ability to
influence companies on the critical issue of climate change, on behalf of our clients in both our active and passive
investment strategies.
Shareholder resolutions have been used under the Climate Action 100+ initiative as a means of promoting better
management of climate risks. As at March 2021, we have participated in 11 collaborative engagements led through
Climate Action 100+.
These include our work in 2020 leading engagement as part of Climate Action 100+ with BHP Group 6, a global
resource mining company and constituent of the HSBC FTSE 100 UCITS ETF:
Issue
BHP is one of the world’s largest producers of iron ore, mining a range of other minerals, including metallurgical
and thermal coal, as well as maintaining oil & gas production. The company had been a leader in its sector in
addressing the challenges of carbon transition but needed to make new commitments to meet rising investor
expectations.
Action Taken
We are the European lead investor with the company and met the company more than a dozen times over the
course of the year, providing feedback on various aspects of its climate strategy, as well as co-ordinating support
investors and engaging with other listed members of the controversial Minerals Council of Australia lobby group.
Outcome
The company added to its existing net zero operational emissions commitment with a 2030 target to reduce
operational emissions by 30%, announced work to explore reductions in scope 3 emissions in its use of shipping
and in steel production, strengthened the link between executive remuneration and the climate plan and improved
its analysis of the impact of a 1.5-degree scenario on its portfolio. It also committed to sell its thermal coal
business.
5
Source: www.climateaction100.org, as at January 2021
6
Source: HSBC Asset Management. For illustrative purposes only and does not constitute any investment recommendation in the above mentioned companies.
This example is historic and contains information that is not current and should not be construed as an offer to sell or a solicitation of an offer to purchase or subscribe
to any investment, and does not constitute any investment recommendation in the above mentioned companies. The views expressed were held at the time of
preparation and are subject to change without notice. Any forecast, projection or target when provided is indicative only and is not guaranteed in anyway.
6Active ownership - voting
Exercising voting rights is an important expression of our stewardship and broader responsible investment approach,
and we vote on all equities held within our ETFs except in very few cases where the process of cost undermines
investor interests.
Our global voting guidelines aim to protect investor interests, foster good practice and enhance long term value. We
expect companies to apply governance good practice for their market of listing and, for larger companies, to meet
globally-recognised good practice standards.
In 2020, we voted on over 82,500 resolutions at around 8,000 company meetings across 70 markets, representing
96% of the ballots which we were entitled to vote. We supported management on 90% of resolutions, abstaining or
voting against on 10%.
The issue we most frequently opposed was director re-election (30% of votes against management) predominantly for
reasons of lack of independence, followed by executive pay – either because it was too high or not linked to
performance (25%), and capitalisation issues (21%). We voted against at least one resolution at 43% of all company
meetings:
Director elections 30%
Compensation 25%
Capitalisation 21%
Votes against
Transactions 8%
management
Shareholder resolutions - 8%
Routine 6%
Anti-takeover 1%
Our votes differed from the proxy voting standard policy recommendation on more than 7,000 resolutions (8%). More
than half of our votes on these resolutions were against management, with capitalisation and director elections in
China, and executive pay in the US the main areas where we had voted against management more often.
Shareholder dissent has been shown to be an important precursor to leadership and governance changes in firms7,
and in 2020, we engaged with 310 companies to discuss our voting decisions on resolutions where we felt unable to
support management. These companies were prioritised based on our largest holdings and markets and represented
circa 38% of our total HSBC ETF assets under management8.
One key area of voting-related engagement focus for us is board composition. The conduct and composition of a
company’s board are important to a company’s performance, and independent representation on boards is an
important element in advancing the interests of all shareholders. We have focused in particular on Japan, one market
which has some of the lowest levels of independent board representation seen in developed markets.
7
Source: Proxy Advisors and Shareholder Dissent: A Cross-Country Comparative Study, Sauerwald, et al., Journal of Management, 2016
8
Source: HSBC Asset Management, as at 31 December, 2020
7Issue
Many Japanese companies have very few independent directors. The market requirement is for only two outside
directors who need not be independent. We believe that larger companies with international investors can be held
to a higher standard and seek at least one-third board independence.
Action Taken
We write every year to companies in the local TOPIX100 index with independent directors making up fewer than
one-third of their board, asking them to indicate if they will improve their balance. We escalated this issue two
years ago for companies which still did not meet the one third standard by voting against all non-independent
directors, other than the CEO and Founder/President.
Outcome
There has been a steady increase in the number of companies meeting the one-third independence standard. Out
of 71 companies we have written to since 2017, 27 now have at least one-third independent directors on the board.
Our engagement with Japanese companies on this issue is ongoing and we hope to see increased levels of
independent representation on boards, accompanied by increased transparency around the nomination process for
directors.
This should be of benefit to our clients invested in the HSBC MSCI Japan UCITS ETF, which aims to track as closely
as possible the returns of the MSCI Japan Index, made up of large and mid-sized Japanese listed companies. Some of
the companies that we engage with on this issue are found in the top five weighted constituents of the index 9 -
Toyota Motor Corp, SoftBank Group Corp and Keyence Corp. These Japanese companies are also significant in
developed world funds, such as the HSBC MSCI World UCITS ETF.
9
Source: MSCI, as at 31 December 2020
8Active ownership – public policy and advocacy
We meet with regulators and policymakers, both indirectly and through industry networks, to advocate for
progressive public policy action on a range of themes which help safeguard our ETF investors’ long-term interests.
One such theme is improving market standards and transparency on sustainability; we recognise that standards and
transparency are central to providing the appropriate information for us as investors, as well as for our clients.
Companies that measure their ESG impacts are more likely to manage them; those that publish the data can be held
to account.
HKEX – listing requirements
Response to public consultation Outcome
We responded to the public consultation on the ESG reporting guide and This contributed to HKEX’s revision
related listing rules by the Hong Kong Exchanges and Clearing Limited of ESG requirements for Hong Kong
(HKEX), where we expressed support for enhanced disclosures of board listed companies, where most of the
responsibilities over material ESG issues, and their assessment and proposals were adopted, effective
management of climate-related issues, amongst others. for financial years commencing 1
July 2020.
SEC – shareholder proposals rules & proxy voting regulations
Collective investor letter Outcome
The proposals put forward by the SEC to amend shareholder proposals rules Although the changes were largely
and the regulations governing proxy voting advice, prompted us to sign a adopted, the strength of shareholder
collective investor letter, co-ordinated through the PRI, raising our concerns opposition may incentivise the new
that the changes may compromise shareholder rights in the US and US administration to amend them.
cautioning that these changes were likely to cause unintended
consequences that could harm the governance of issuers and ultimately the
value of investments.
9Active ownership for our HSBC ETFs – looking forward
Our established active ownership approach including voting, engagement, public policy and advocacy drives positive
behaviour, promotes high standards and ensures the interests of all stakeholders are considered. We use our
influence as global, large investors, to try to enhance the companies in which our ETFs invest.
HSBC’s ETF solutions are built on our strong index tracking heritage, with over 30 years’ experience managing
passive equity portfolios. Active ownership is central to our philosophy, beliefs and processes and as such is an
important part of how we maximise long-term value for our ETF clients.
Looking ahead, we recognise the responsibility we have towards continuing to improve market standards and drive
positive corporate practices, including in the areas of board composition and executive remuneration. Our
engagements will also continue to focus particularly on supporting the transition to a low-carbon economy – reducing
the role of coal and other fossil fuels – as well as protecting biodiversity.
Consideration of these important stewardship issues while investing efficiently through our established and
disciplined processes is critical to delivering sustainable value for our ETF clients.
10Important information
Key risks
The value of an investment in the portfolios and any income from them can go down as well as up and as with any
investment you may not receive back the amount originally invested.
Concentration risk: The Fund may be concentrated in a limited number of securities, economic sectors and/or
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Derivatives risk: Derivatives can behave unexpectedly. The pricing and volatility of many derivatives may diverge
from strictly reflecting the pricing or volatility of their underlying reference(s), instrument or asset
Emerging Markets risk: Emerging markets are less established, and often more volatile, than developed markets
and involve higher risks, particularly market, liquidity and currency risks
Exchange rate risk: Changes in currency exchange rates could reduce or increase investment gains or investment
losses, in some cases significantly
Index tracking risk: To the extent that the Fund seeks to replicate index performance by holding individual
securities, there is no guarantee that its composition or performance will exactly match that of the target index at any
given time (“tracking error”)
Investment leverage risk: Investment Leverage occurs when the economic exposure is greater than the amount
invested, such as when derivatives are used. A Fund that employs leverage may experience greater gains and/or
losses due to the amplification effect from a movement in the price of the reference source
Liquidity risk: Liquidity Risk is the risk that a Fund may encounter difficulties meeting its obligations in respect of
financial liabilities that are settled by delivering cash or other financial assets, thereby compromising existing or
remaining investors
Operational risk: Operational risks may subject the Fund to errors affecting transactions, valuation, accounting, and
financial reporting, among other things
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